The Storms Have Arrived: Robert Arnott

Consuelo Mack recently interviewed Robert Arnott, Founder and Chairman, Research Affiliates. Arnott has been a pioneer in the fundamental indexing movement. He also manages PIMCO’s All Asset All Authority Fund.

Arnott feels we are in a recession already and the economy crested in June. He also thinks U. S. stocks are in a bear market and the next leg is likely down.

Arnott said the deficit is 10% of GDP which is debt financed consumption and not prosperity. He said, adjusted for debt financed spending, we are “bottom bouncing” barely above the 2009 depressed levels of GDP.

Arnott is still cautious on U. S. equities, but not all of them. He said value stocks are not so expensive. He made a provocative long/short suggestion to buy Bank of America (BOA) and short Apple (AAPL). Arnott doesn’t think it’s likely AAPL will grow enough to justify being the largest capitalization stock in the world.

When asked what he looks for in a stock, Arnott said an above average yield and a lack of headwinds. He mentioned emerging economies, most of whom don’t have deficit issues or demographic headwinds. Arnott said it was important for an economy to have a large concentration of population in the 20-40 age range which many emerging market economies have.

Arnott said the U. S. bear market will pull down emerging markets stocks creating some interesting bargains. He pointed out that emerging markets bonds have 7 times more debt coverage but yield 3.5% more than developed market bonds. Arnott indicated past defaults have made investors shy away from emerging market bonds.

Arnott has no problem with owning gold if it helps an investor sleep better at night. He mentioned that fiat currencies have failed in the past. However, Arnott said investors would be better served with a basket of commodities.

Arnott called high-yield bonds a “stealth inflation hedge.” He said the correlation of inflation and high-yield bonds was higher than the correlation between inflation and TIPs. Arnott said TIPs were expensive given their negative yields, but considered them an insurance policy of sorts against very high inflation rates. Arnott gives 50/50 odds there will be double digit inflation sometime in the next 10 years. He feels the temptation to debase the currency and debt will be politically overwhelming.

Ms. Mack asked Arnott what his choice for one investment would be. He said it would be a fundamental index for emerging markets stocks given it is held it for at least 5 years. He considered deep value emerging markets stocks attractive, although investors should average into them.

Disclaimer: It is very difficult to outperform a buy and hold strategy. Many investors have found themselves best served over long time horizons by investing regularly in a diversified portfolio of stocks or low cost, broadly diversified indexed stock funds. Information presented is based on analysis of past data and assessments by the Tactical Timing System model. Future performance may not reflect past performance. Profitable trades are not guaranteed. No system or methodology ensures stock market profits. Although accuracy is strived for, no guarantee is made regarding the accuracy of data presented. Nothing presented here should be considered investment advice, but merely the humble opinion of the author.